Section 882 deduction limit is a partner-level affected item

Plain-English summary

Chief Counsel advised that the section 882 limitation on deductions is not a partnership item because the partnership does not determine it under subtitle A. It is instead a partner-level affected item, like the at-risk, passive-loss, and outside-basis limits. The IRS should disallow the deductions through an affected-item notice of deficiency under section 6230(a)(2)(A)(i). It need not first open and close a TEFRA partnership proceeding, but it remains bound by the deduction amounts reported on the partnership return before applying the partner-level limit.

Ruling snapshot

• Question: Is the section 882 deduction limitation a partnership item, and how should the IRS disallow affected deductions?
• Outcome: Advice given: treat it as a partner-level affected item and issue a notice of deficiency.
• Key authorities: IRC §§ 703, 882, 6230, and 6231; Treas. Reg. § 301.6231(a)(5)-1; Roberts v. Commissioner, 94 T.C. 853 (1990).

Full text (IRS public release)

ID: CCA_2015032710120101
[Third Party Communication:

UILC: 882.03-00, 6231.05-00
Date of Communication: Month DD, YYYY]

Number: 201515029
Release Date: 4/10/2015
From:
Sent: Friday, March 27, 2015 10:12:01 AM
To:
Cc:
Bcc:
Subject: FW: IRC 882(c)(2) and TEFRA (POSTS-143012-14)

The section 882 limitations on deductions is not a partnership items because it is not something the partnership must determine under Subtitle A. I.R.C. 6231(a)(3) and 703.

Instead, the limitation is a partner-level affected item similar to partner limitations on partnership deductions under the at risk (sec. 465), passive loss (sec. 469) and outside basis limitations (sec. 704(d) rules. See Treas. Reg. 301.6231(a)(5)-1(a) through -1(d).

Consequently, the deductions should be disallowed through an affected item notice of deficiency issued under section 6230(a)(2)(A)(i).

Under Roberts v. Commissioner, 94 T.C. 853, 860 (1990), we do not have to open and close a TEFRA partnership proceeding before issuing such affected item notice of deficiency. But for the purposes of the affected item notice, we will be bound by the amounts reflected on the partnership return, before application of the partner-level limitations on those amounts. Id. at 862.